Gratuity

Gratuity is a sum of money paid by an employer to an employee for services rendered in the company.

• However, gratuity pays only to employees who complete 5 or more years with the company.
• It can understand as a form of tips paid by the employer to the employee for services offered in the company.

As per the Payment of the Gratuity Act of 1972,

It is applicable to all establishments including NGOs, educational institutions, and hospitals with an employee size of 10 or more.

Once the Payment of Gratuity Act 1972 becomes applicable to an establishment, the Act would continue to remain applicable despite the fact that the team size has reduced to a number less than 10.

Eligibility for Gratuity Payment

An Employee,

• Should be eligible for superannuation
• Retires after completing 5 years of working with the same organization.
• Resigns after 5 years of working with the same organization or with a single employer
• Passes away or suffers disability due to illness or an accident.

The formula for Calculation

Gratuity is dependent upon the total number of years serves in the company and the last drawn salary.

If A is (number of years of service in a company) + B is (last drawn salary) {Basic Salary + Dearness Allowance}+{commission}

Then, Gratuity = AB15/26; 15 being wages for 15 days and 26 being the days of the month.

For example – Ankit has worked for QC Associates for 10 years and his last drawn salary (Basic + Dearness Allowance) is Rs 30,000.

Hence Ankit’s gratuity amount would be – 1030,00015/26 = Rs 1,73,076

Tax Treatment of Gratuity

It receives by the employee is taxable under the head ‘Income from salary’.

In case, received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’.

This tax treatment varies for different categories of individual assessees.

We shall discuss the tax treatment of gratuity for each assessee in detail.

For the purpose of calculation of exempt, employees may be divided into 3 categories –

• Government employees,
• Non-government employees covered under the Payment of Gratuity Act, 1972
• Non-government employees not covered under the Payment of Gratuity Act, 1972

In the case of Government Employees – they are fully exempt from receipt of gratuity.

Rules

Forfeiture of Gratuity

According to the Payment of Gratuity Act of 1972, an employer holds the right to forfeit their gratuity payment, either wholly or partially despite the employee having completed 5 and more years of service in a company.

The only situation where this works is when the employee has terminated due to disorderly conduct wherein he/she tries to physically harm individuals during the course of his/her employment.

Timeline for Gratuity payment

1.Initiation

An individual or an authorized person must send in an application to an employer regarding the gratuity he/she is owed by a company.

2.Acknowledgment and calculation

As soon as the application receives, the company which owes gratuity will calculate the amount and also provides a notice of the same to the individual and the controlling authority with the amount specified.

3.Disbursal

The employer, having sent the acknowledgment, has a time period of 30 days to pay the gratuity amount to the individual.

Few Significant Points

Following are some of the most prominent points of payment of gratuity by an employer to an employee.

• An employee can receive a gratuity amount higher than Rs.10,00,000 from his/her employer, the exemption for tax, in this case, will calculate as per the points listed above under taxation.
• The employer has the right to reject payment of gratuity to an employee if he/she has been asked to leave his/her job owing to any misconduct.
• In case of death of the employee, the nominee or heir of the employee pays the gratuity amount.
• The taxation for this calculates for the receiver under the head – income from other sources.

Other Points

• An employee can claim gratuity before completion of 5 years only in two instances i.e occurrence of death or occurrence of disability due to illness or accidents.
• In the instance of Death, the claim would transfer to the assigned nominee.
• Taxability of gratuity is dependent on which sector does the employee belong to.
• Gratuity amount is not taxable in case of government employees.
• Non-government employees can also get a Tax exemption on their gratuity amount.
• Although, there is an upper limit of Rs 10 lakhs for the tax concessions.

An employer can forfeit gratuity even if the employee has completed the required 5 years of service in the following cases –

• If the services of such employee have terminated for his disorderly conduct or any other act of violence.
• If the service of an employee has terminated for any act which constitutes an offense involving immorality, provided that such offense commits by him in the course of his employment.

It must be noted that the above act should have been committed by the employee during his employment.

A proper inquiry must be held after which the employee was proved guilty of misconduct and a termination note must be issued to the employee describing his/her misconduct.

• The employer cannot pay you more than Rs 10 lakhs irrespective of the number of years you have completed. This limit is also applicable to receive from different employers during your lifetime.
• The government mandates employers to pay the amount within 30 days.
• Usually, it will release along with the full and final settlements of the employee.
• If there is a delay in payment, the employer has to pay simple interest on the amount from the due date until the payment made.

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